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16 Oct 2006
Moody's upgrades Southern California Edison Company
Approximately $7 Billion of Debt Securities and Bank Credit Facilities Affected
New York, October 16, 2006 -- Moody's Investors Service upgraded the long-term ratings
of Southern California Edison Company by one notch (SCE: senior
unsecured debt to A3 from Baa1), affirmed SCE's short-term
rating for commercial paper at Prime-2, and assigned an Issuer
Rating of Baa2 to parent company, Edison International (EIX).
Moody's also affirmed the rating of Edison Funding Company (EFC),
an EIX subsidiary, at Ba1. The rating outlook for SCE,
EIX and EFC is stable.
"While numerous challenges remain for electric utilities operating
in California, the SCE upgrade reflects demonstrated evidence of
the sustainability of strong credit quality measures due, in part,
to more predictable regulatory actions by the CPUC", said
A.J. Sabatelle, Moody's Vice President.
The rating upgrade at SCE reflects an expectation of continued strong
financial metrics due to favorable rate case decisions rendered by the
California Public Utilities Commission (CPUC) within the recent past year
all of which point to a more supportive and somewhat more reliable regulatory
environment within the state. Of particular note is the outcome
of SCE's general rate case decision in the second quarter 2006 which
authorized base rate increases of about $274 million for 2006,
$74 million in 2007 and $104 million in 2008. The
upgrade recognizes the effectiveness of rate mechanisms established by
legislation and implemented by the CPUC to mitigate changes in fuel and
purchased power costs, and considers the recent CPUC decision to
grant SCE a waiver from filing a test year 2007 cost of capital application
thereby maintaining the existing 11.6% authorized ROE through
the end of 2007.
SCE's ratio of funds from operations to total debt is expected to
be well above 25% over the next several years while at the same
time funds from operations coverage of interest expense continue to exceed
5 times. These financial measures, which incorporate Moody's
standard adjustments, are consistent with a low A rated utility
that operates in a more challenging regulatory environment and are in
accordance with the guidelines in Moody's rating methodology for electric
utilities in the higher end of the medium global risk category.
EIX's Baa2 Issuer Rating considers the reduction in consolidated
leverage that has continued since 2003, the stable financial performance
expected at SCE, the continued reliance on SCE as a principal source
of cash flow and earnings for the next few years and the favorable prospects
for Edison Mission Energy (EME: Ba3 Corporate Family Rating),
its independent power subsidiary. EIX's ratio of total adjusted
consolidated debt to total adjusted capitalization which has declined
from 71% in 2003 to 65% at June 30, 2006, is
expected to decline to 60% by 2008 when an $800 million
Mission Energy Holding Company obligation is repaid at maturity from accumulated
cash on hand. Additionally, through its ownership of well-positioned,
low-cost coal-fired electric generation assets in the Midwest
and PJM, EME intends to manage its generation and trading activities
to produce more predictable earnings and cash flow over the next few years
due in large part to the company's forward hedging strategies implemented
for its electric output. Given EIX's reliance on the more
volatile wholesale power business and its exposure to the more challenging,
but improving, regulatory environment in California, Moody's
considers EIX's overall business position to be at the higher end
of the medium global risk category.
Moody's expects EIX's ratio of consolidated funds from operations
to total debt to be around 20% over the next several years,
and its consolidated funds from operations coverage of interest expense
to approach 4x during that period. These financial measures,
which incorporate Moody's standard adjustments, are consistent with
a mid Baa rated utility holding company in accordance with the guidelines
in Moody's rating methodology for electric utilities at the higher end
of the medium global risk category.
The rating affirmation for EFC (Ba1 senior unsecured) and stable rating
outlook reflects the company's reliance on cash received through
the operation of Tax Allocation Agreements among EFC, its ultimate
parent, EIX, and other EIX subsidiaries. The rating
considers the ongoing Internal Revenue Service audit concerning three
large leverage lease transactions entered into by EFC in the mid-1990's,
and the expectation that resolution of this issue will likely take several
years. The rating further incorporates the fact that EFC's
day-to day business is being run by EME management and considers
EIX's plan to harvest EFC's existing portfolio and not make
new investment through EFC.
The stable rating outlook for SCE reflects expected continuation of strong
predictable cash flows derived from the company's large and diverse service
territory, and that SCE will be able to manage its growth while
maintaining a conservative capital structure, particularly given
the size of the capital budget for both generation and delivery related
assets. The stable outlook further reflects an expectation that
the current trend of constructive regulatory and legislative support from
the CPUC and the California legislature will continue, as key constituents
work to strengthen the durability and predictability of the California
In light of the company's very sizeable capital expenditure program
as well as the region's need to add generating resources,
some of which will likely be built by SCE, limited prospects exist
for the rating to be upgraded over the next several years. The
rating of SCE could be downgraded if the company elects to finance its
growing capital expenditures more aggressively with higher leverage,
if certain California Department of Water Resources contracts are assigned
to SCE without supportive action from the CPUC, or if there is a
reversal of the current trend of increasing regulatory consistency.
The stable outlook for EIX considers the stability of its principal subsidiary,
SCE, a conservatively financed capital expenditure program,
and the continuation of reliable cash flow and earnings contribution from
EME. In light of the size of SCE's anticipated capital expenditure
program and expected growing contribution from EME, a weaker subsidiary,
limited prospects exist for the rating to be upgraded over the next several
years. EIX's rating could be downgraded if the company were
to pursue a more aggressive capital management program or if the credit
quality of its principal subsidiary, SCE, were to substantially
Separately, Moody's has withdrawn the ratings for the multiple shelf
registration at EIX, whose ratings range from (P) Baa3 to (P) Ba1
and shelf registrations for preferred stock at EIX and at EIX Trust III,
both rated (P) Ba1, as the capability to issue under these shelf
registrations has expired.
- SCE's first mortgage bonds, secured pollution control bonds,
and secured bank credit facility to A2 from A3;
- SCE's senior unsecured debt, senior unsecured pollution
control bonds, and Issuer Rating to A3 from Baa1;
- SCE's preference and preferred stock to Baa2 from Baa3;
- Multiple senior shelf registration at SCE to a range of (P)Baa2
to (P)A2 from a range of (P)Baa3 to (P)A3;
- Shelf registration for the issuance of preference and preferred
stock at SCE Trust I, SCE Trust II, and SCE Trust III to (P)Baa2
- EIX, Issuer Rating of Baa2
Headquartered in Rosemead, California, SCE is a vertically
integrated utility and a wholly-owned subsidiary of EIX.
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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